Steve Rose has a new piece on wage growth being published by the Urban Institute which was previewed in a blog post in the Wall Street Journal. It shows a considerably better picture than most of us are used to seeing. Whereas my friends at the Economic Policy Institute (EPI) show the real median wage for men has fallen by 7.4 percent between 1979 and 2011, Rose finds that real annual compensation for men has risen by 13.4 percent. EPI’s data show that the median hourly wage for women has risen by 24.2 percent. Rose finds a gain of 73.0 percent.
There are three issues that explain the differences. The main difference for women is the increase in average annual hours worked. Women are far more likely to be full-time full year workers in 2013 than they were in 1979. This is largely due to a breakdown of the barriers that excluded women from most types of better paying jobs and social norms that tended to confine women to working in the home. While the increased opportunities for women is clearly a positive development, we would expect pay to rise accordingly. People expect to be paid more for working forty hours a week than for working 30 hours a week. Therefore if we find that people having higher earnings because they are working more hours rather than getting higher hourly pay, it doesn’t really change the wage stagnation story.
The second issue is that Rose is looking at total compensation rather than just hourly pay. This includes payments that employers make for Social Security taxes, health care insurance and defined contribution pensions. This matters more for the 1980s, when there were substantial increases in Social Security and Medicare taxes than in the last two decades.
Looking at compensation in principle is reasonable if we want to know what workers are paid for their work, but it does raise some issues. The most important is that Rose’s measure only counts payments to defined contribution pensions, not payments to defined benefit pensions. This means that a switch from defined benefit pensions to defined contribution pensions would show up as an increase in compensation in Rose’s measure, even if no more money is being paid by the employer. This switch only explains a small part of the difference in wage growth, but it is certainly peculiar.
Neil Irwin generally has insightful economic analysis in his NYT Upshot pieces, however he strikes out in his turn to power politics today. He tells readers:
"German leaders genuinely believe that a new deal along those lines would be bad economic policy for Greece. Many economists at the International Monetary Fund and American officials would argue it is entirely sensible. The fact is that the time for those debates is over for now; we’re in a realm of power politics, not substantive economic policy debates.
"The choice for leaders of Germany, France and the rest of Europe will look something like this:
"If they tolerate the Greek government’s demands, they will be setting a bad example for every other country that might wish to challenge the strictures of the European Union, telling voters in Portugal and Spain and Italy that if they make enough fuss, and elect extremist parties, they too will get a much sweeter deal. It would send the signal that a country can borrow all it likes, walk away from those debts and make the rest of Europe pay the bill, as long as it is intransigent enough."
Actually, the choice for leaders of France and the rest of Europe does not look like this.
It may be true that, "German leaders genuinely believe that a new deal along those lines would be bad economic policy for Greece." German leaders do show considerable evidence of having no understanding of economics. This is why they are taking positions that put them at odds with economists at the I.M.F. and just about everywhere else. The evidence of the last five years contradicts their claims about the economy as completely as possible, but it appears that many people in top positions in Germany are genuinely flat-earthers who simply can't accept that the world is round and that the euro zone economy is suffering from a shortfall of demand and need not worry about debt.
However, there is no reason to believe that leaders in France and the rest of Europe suffer from the same learning disability. Therefore, they may recognize that the main reason Greece has been forced to borrow large amounts of money over the last five years and run up its debt has not been its profligate spending, but rather the strangling of its economy.
Sharp cutbacks in government spending led to a huge reduction in demand. Since Greece is in the euro, there was little possibility for much increase net exports through a reduction in the value of its currency. Also, since the other euro zone countries were also pursuing austerity, they would not provide growing markets for Greek exports. In this context, it was virtually inevitable that Greece's economy would contract sharply. This means bringing in less tax revenue. It also leads to more spending for things like pensions, as workers who are unable to find jobs opt to retire earlier than they would have otherwise and start collecting their pension.
The leaders of France and the rest of Europe may understand the basic economics here. This means that rather than blessing profligate spending, a turn to favor Greece means rejecting failed economic theories that have devastated the euro zone's economy. This would mean pushing for higher spending in the core countries, especially Germany, and pursuing other mechanisms for increasing demand.
Yep, some things never change. Robert Samuelson tells us the tragic story of Greece: it needs to reduce its debt, but to do so it has to raise taxes and/or cut spending. That slows growth, which raises unemployment and also lowers its GDP, quite possibly raising its debt-to-GDP ratio. After telling us that there is no easy exit from this problem for Greece, Samuelson goes on:
"But it’s important to note that Greece’s predicament, though extreme, is shared by many major countries, including the United States, Japan, France and other European nations. ...
"When only a few countries are over-indebted (meaning they cannot borrow from private markets at reasonable interest rates), this isn’t necessarily true. Countries can dampen domestic consumption and rely on export-led growth to take up the slack and limit unemployment. Nor is debt automatically bad. It has obvious productive uses: to fight severe recessions; to pay for wars and other emergencies; to finance public “investments” (roads, schools, research).
"Unfortunately, this standard view of government debt — we’re not talking about household and business debt — does not fully apply now. The reason is that numerous countries face similar problems."
So Samuelson thinks that many countries cannot borrow at reasonable interest rates? That's not what I read in the newspapers.
Let's see, according to the Economist, the United States can borrow long-term at less than 2.3 percent interest. That's less than half of the rate during those wonderful Clinton years when we were paying down the debt. Canada can do even better, paying just 1.7 percent. Those no-good-lazy-croissant-eating French types can borrow at a less than a 1.3 percent rate. The frugal Germans have to pay just 0.8 percent, a bit more than the hugely indebted Japanese who can get away with paying less than 0.5 percent.
In short, almost everyone other than Greece can borrow at extremely low interest rates. (Those high rates are their euro zone dividend.) Rather than being some difficult conundrum as Samuelson tries to tell his readers, this story is about as simple as it gets. The world is suffering from a huge shortfall in demand. We need people, businesses, and/or governments to spend money.
Unfortunately, the deficit gestapos are preventing more spending for reasons that defy logic but undoubtedly make sense to them. Anyhow, this is a really simple story, even if there is a lot of money to be made in trying to make it appear complicated.
Philosophers have debated the nature of knowledge for millenniums, but it turns out that the Washington Post has the secret. In a mostly useful article on the high and rising prices of prescription drugs it told readers:
"Patents are necessary to encourage companies to innovate, but they also slow the progress of cheaper generic versions of drugs to market, and allow drug companies to charge much more in the interim than they could if they had more competition."
Hmm, patents are necessary to encourage companies to innovate? There is no other mechanism? Do U.S. defense contractors innovate? They may get patents, but they are mostly paid on contract. If there is a reason that people will refuse to innovate for money, but will only innovate with the incentive of a patent monopoly, it would be interesting to know what it is.
As a practical matter, patents are an incredibly inefficient mechanism for financing drug research for reasons mentioned in this article and others. If the research costs were paid upfront all of these amazing new drugs would be cheap to patients and we would not have to waste time fighting over who would pay the tab. (At the point the drug has been developed, the costs have already been paid. Why not make the drug available at the marginal cost? That is the economist's approach.)
Paying for research upfront would also have the advantage that all the findings would be in the public domain. This means that doctors would be better informed about which drug might be best for their patients. It would also mean that money would not be wasted pursuing paths that had already been shown to be dead ends. In addition, since no one is getting huge patent rents from having people use their drugs, upfront funding would take away the incentive to deceive the public about the safety and effectiveness of drugs, which has led to so much needless suffering.
Rather than trying to tell people that we need patents to finance research, a lengthy piece like this could at least have noted that many economists, such as Nobel laureate Joe Stiglitz, have argued for more efficient alternatives to the patent system. This is exactly the sort of article where this issue should be raised.
The NYT headlined a front page piece, "health insurance companies seek big rate increases for 2016." The piece told readers insurance companies "are seeking rate increases of 20 percent to 40 percent or more, saying their new customers under the Affordable Care Act turned out to be sicker than expected." It then goes on to list specific instances where insurers are seeking large rate increases.
There are several problems with this story. First, it does not try to give any sort of weighting which would give a basis for the assessing the typical increase seen by people getting insurance through the exchanges. This matters both because some plans have more people enrolled than others and also because the percentage increase makes a much bigger difference for older people with high average premiums than for younger people. The average cost for a plan for people in the oldest age group (55–64) is three times as much as the average for people in the under 35 age group. If people in the latter age group see a 20 percent rise in their premiums it will imply a much smaller dollar increase than for the former group.
Since the article made no effort to assess the number of people in plans requesting large premium increases nor the amount of the premiums, there is no way to assess the increase in the premium for the typical person. The article does refer to a study by the Kaiser Family Foundation, and notes that it finds relatively small increases for the second lowest cost plan. However, it does not give readers the amount of increase found in this study and points out that to avoid a large increase it may be necessary to change plans, which could also mean changing doctors.
The Kaiser study found that the premium for the second lowest cost silver plan (the benchmark for subsidies in the exchanges) is projected to rise by 4.4 percent between 2015 and 2016 in the eleven cities it examined. It also is important to note that even staying in the same plan does not guarantee that a patient can continue to see their doctor, since doctors often leave plans.
The article also misrepresents the issue of the health of beneficiaries telling readers:
"Some say the marketplaces have not attracted enough healthy young people."
Actually, it doesn't matter whether people are young, it matters whether they are healthy. A healthy older person pays on average three times as much to insurers as a healthy young person and gets the same amount back in payments. Also, the losses described in this article would be largely offset by the backstops put in place in the ACA for insurers that enroll less healthy patients.
As the Kaiser report points out:
"Some of this remaining uncertainty is mitigated by the ACA’s “3 R’s” programs. These programs – risk adjustment, reinsurance, and risk corridors – redistribute risk among insurance carriers so that plans that enroll disproportionately sicker or higher-cost enrollees can be prevented from having to significantly raise premiums."
There is a real issue here, since people should not have to be constantly changing plans to ensure that they have affordable insurance, however this article does little to indicate the extent to which this is actually a problem, although it is likely to scare many readers.
Thanks to Robert Salzberg for calling this article to my attention.
Remember the robots that are going to take all our jobs leaving us unemployed? Apparently they don't have robots in Europe. That's the story readers would get from a mostly useful set of charts in the Washington Post comparing Greece and Germany.
Underneath the chart comparing the populations of the two countries the article tells readers:
"Despite the difference, both countries share a troubling trend: a shrinking population. Europe is experiencing a demographic time bomb as the continent ages and birth rates fall, leading to questions about whether there will be enough workers to power a dynamic economy in the decades to come."
This is of course 180 degrees at odds with the robots making us all unemployed story. That is a story of too many workers. The Post is telling us here a story of too few workers. It is possible for one or the other to be true, but not both. Only a D.C. policy wonk could possibly take both problems seriously.
As a practical matter, we are likely to see productivity growth in the future comparable to what we have seen in the past. At the low end, it would be around 1.5 percent a year. At the high end we could envision getting back to the Golden Age (1947–73) rates of growth of 3.0 percent. The low end would still leave us easily able to care for our aging population and enjoy rising standard of livings. (Guess what, we have always had an aging population.) The high end should allow for more rapid improvements in living standards but there is no more reason to think that it would lead to mass unemployment than did the Golden Age productivity growth.
Since several commentators have raised questions about the similarities between the debt situations of Greece and Puerto Rico, it is worth pointing out some important ways in which they differ. Puerto Rico gets the benefit of several important federal government programs which will continue regardless of the finances of its own government. This means that if its own government ceases to exist due to financial paralysis, the people of Puerto Rico can still count on their monthly Social Security checks, their Medicare payments for their health care, and food stamps for low-income families. The people of Greece do not receive any comparable benefit from the European Union.
The banks and financial system in Puerto Rico is also supported by the FDIC, the Fed, and Fannie Mae and Freddie Mac. This means that if every bank in Puerto Rico goes belly up because its economy is a wreck, all the depositors can still count on getting their money back up to the FDIC limit. If the housing market collapses, people will still be able to buy homes because Fannie Mae and Freddie Mac are prepared to buy up the mortgages.
The bulk of aid to Greece has taken the form of the I.M.F., the E.U., and the E.C.B. making payments to Greece's creditors. This was initially the banks who were bailed out of their bad loans and more recently to themselves. It has not gone to help the Greek people. If the Syriza government were offered terms comparable to those Puerto Rico now has, the only fight would be over how quickly they could get a pen to sign the deal.
This doesn't mean Puerto Rico doesn't have very serious economic problems as a result of being tied to the U.S. dollar, but it has a range of supports that are beyond the dreams of the people of Greece.
It is always cute when a major news outlet decides to blame problems on a policy it doesn't like in a new story. That is what the Wall Street Journal did today in a news story that told readers Puerto Rico's main problem is having the same minimum wage as the rest of the United States.
While the minimum wage is clearly high relative to labor productivity in Puerto Rico, its economic performance over the last four decades cannot be reconciled with a story where the minimum wage is the main culprit. Puerto Rico's minimum wage converged to the U.S. minimum wage over the period 1978 to 1983. In spite of this sharp increase in the minimum wage, Puerto Rico's unemployment rate fell sharply from the 1970s to the 1980s as its economy experienced strong growth (figures 3 and 4). While the unemployment rate in Puerto Rico remained higher than in the United States, the general direction was downward until the recession hit in 2007.
This simple story suggests that the minimum wage cannot be the main culprit. It is certainly possible that the minimum wage may have led to somewhat higher unemployment than would otherwise be the case, but the cause of the Puerto Rico's economic crisis must be elsewhere.
Note: An earlier version described the article as a front page story. The article did not run on the front page of the paper.
Further Note: The WSJ had a much fuller account of Puerto Rico's economic problems earlier in the week.
The introduction to a Morning Edition segment on the response in Spain (sorry, no link) told listeners that Spain was undergoing austerity to pay down its "massive debt." This is inaccurate. Spain did not have anything that can be remotely described as massive debt before the austerity policies imposed on the country by its creditors.
Prior to the collapse of the country's housing bubble, Spain's debt to GDP ratio was 26 percent, just over one-third of the U.S. level. It was running surpluses of more than 2.0 percent of GDP, the equivalent of a budget surplus of roughly $350 billion a year in the United States. (Its worth noting that Greece's debt to GDP ratio was a much more manageable 107 percent of GDP before the crisis and austerity pushed it to 170 percent of GDP.)
The segment also is a bit out of line with reality in touting Spain's economic success under austerity. It boasted that Spain had the strongest growth in the euro zone. This is an extremely low bar. Spain's growth rate did not cross 3.0 percent last year and is not projected to do so this year. By contrast, it averaged almost 4.0 percent in the last two years before the crash. Countries recovering from steep downturns are expected to have faster than normal growth.
According to the I.M.F.'s growth projections (which have consistently proven to be overly optimistic) Spain's per capita income will not surpass its 2007 level until 2018. This is a considerably worse than the situation faced by the United States in the Great Depression. The OECD puts Spain's unemployment rate at 22.7 percent as of April.
The Washington Post ran a map showing which countries in Europe use the euro and which use other currencies. The map is wrong. It shows Montenegro and Kosovo as using currencies other than the euro. This is not accurate, both countries do use the euro as their official currency although they have not have been accepted into the euro zone.
This is important in the context of the discussions on Greece because it illustrates the point that Greece cannot be forced off the euro. The European Commission and the European Central Bank can impose incredibly onerous conditions on Greece, but they cannot prevent the country from using the euro if it so chooses. The decision to leave the euro could only be made by the Greek government, not its creditors.
A NYT article reported on a new commitment by China to reduce its emissions of greenhouse gases. At one point it referred to China as the world's second largest economy. Actually, using a purchasing power parity measure of GDP, which is the one most economists would use to measure an economy's size, China passed the United States last year and is now close to 4 percent larger. (China's economy would be about 6 percent larger if Hong Kong is included.)
In the context of GHG emissions it is important to note that a substantial portion of China's emissions are associated with producing items for consumption in the United States and elsewhere. China has an overall trade surplus and a large surplus on manufactured goods.
They're really lowering the bar big time over at the Washington Post. An editorial condemning the Greek government and urging Greek voters to accept the last offer from its creditors told readers, "the Greek economy had started to perk up prior to Mr. Tsipras’s ascendance."
The Greek economy did grow in 2014. According to the I.M.F., the per capita growth rate last year was 1.4 percent. Since per capita income in Greece is down by almost 25 percent from its 2007 level, at the 2014 growth rate the country will be back to its 2007 income level by 2035.
The piece also called on the government for further cuts in what it described as Greece's "unsustainable pensions." These pensions have already been cut by more than 40 percent and now average less than 700 euros (@ $800) a month. The pensions may well be unsustainable under the macroeconomic policies being imposed by Greece's creditors, but this is primarily because these policies have pushed Greece into a depression. The result has been a sharp reduction in the number of workers paying into the pension system and a big increase in the number of workers collecting pensions, since many have been forced by economic conditions to retiree early.
Using the I.M.F. projections from April 2008 as a benchmark, the policies pursued by the euro zone leadership will have the cost the region more than $10 trillion (@ $30,000 per person) by the end of 2015. In this context it is interesting that the Washington Post condemns the Greek government as being irresponsible.
The NYT had a bizarre front page article about the limited effectiveness of monetary policy in the euro zone and elsewhere. The headline of the piece refers to "trillions" of dollars being spent by central banks, a line repeated in the first sentence:
"There are some problems that not even $10 trillion can solve.
"That gargantuan sum of money is what central banks around the world have spent in recent years as they have tried to stimulate their economies and fight financial crises."
In fact, central banks have not spent this money, they have lent this money, mostly by buying government bonds. This matters hugely because lending is a much more indirect way to boost the economy than spending.
Lending by central banks is supposed to boost growth by lowering interest rates. This encourages borrowing in the public and private sectors. This helps to explain the growth in debt in recent years. Rather than indicating a troubling situation, this was actually the point of the policy. Rather than focus on the amount of debt countries, companies, and individuals have incurred, it would be more reasonable to examine their interest burdens. These are mostly quite low.
For example, Japan's interest burden is less than 1.0 percent of GDP in spite of having a debt to GDP ratio of more than 200 percent. This is due to the fact that the interest rate on even its long-term debt is well below 1.0 percent.
The Bank of International Settlements (BIS) issued a new report warning of the dangers of low interest rates. Robert Samuelson wants us to take these warnings very seriously, effectively saying that another crisis could be around the corner due to the recent build up of debt.
First, it is worth noting that warning of disaster due to expansionary monetary policy is what they do at the BIS, sort of like basketball players play basketball. The BIS has been warning for years that inflation was about to kick up if central banks didn't start raising interest rates. Of course, the exact opposite has happened, inflation rates have fallen and most central banks have been actively trying to increase the inflation rate from levels they view as too low to support growth.
The second point is that the rise in debt in a time of low interest rates is to be expected for two reasons. First, at low interest rates governments, corporations and individuals have more incentive to take on debt. This is not obviously a problem. For example, many corporations have taken advantage of extraordinarily low interest rates to issue long-term bonds. This gives them the opportunity to have cash to work with for decades into the future at very low cost. In these cases, they have the cash on hand and can easily meet their interest obligations.
In response to questions from people everywhere, I will share a couple of quick thoughts on the possible departure of Greece from the euro. First, several people have raised the possibility of Greece being thrown out of the euro.
There is no way that Greece can literally be thrown out of the euro in the sense of being prohibited from using the euro. Any country has the option to use any currency it chooses. This was an issue that came up in the referendum over Scottish independence. The independence movement wanted to leave the United Kingdom but to continue to use the British pound as its currency. U.K. Prime Minister David Cameron said that the Scots could not keep the pound if they left the United Kingdom.
This was not true, unless the U.K. was prepared to invade Scotland and physically prevent their banks and stores from using the pound. The Bank of England could refuse to support any of the Scottish banks, which would make it highly undesirable for them to use the pound, in addition to the fact that the U.K. would not be setting monetary policy for the benefit of Scotland, but Scotland would certainly have the option to continue to use the pound for their currency.
In this vein, there are several countries around the world that use the dollar for their currency, including Panama, Ecuador, and Zimbabwe. They did not need to get permission from the United States to use the dollar, they just opted to do it (in the case of Ecuador and Zimbabwe to end hyperinflation).
In this way, Greece will have the option to keep the euro indefinitely. It is difficult to see why it would want to if it lacks the support of the European Central Bank, since it would almost certainly mean a substantially worsening of its economy from its current Great Depression levels of output. However if Greece's leaders decide that keeping the euro is more important than reviving the economy, the eurozone authorities cannot keep them from doing it, short of an armed invasion.
The Wall Street Journal passed along warnings from the Bank of International Settlements (BIS) that central banks should start to curtail monetary expansion and that governments need to reduce their debt levels. The piece tells readers:
"The BIS has issued similar warnings in recent years concerning an overreliance on monetary policy, but its advice has gone largely unheeded."
It is worth noting that the BIS has been consistently wrong in prior years, warning as early as 2011 about the prospects of higher inflation due to expansionary monetary policy:
"But despite the obvious near-term price pressures, break-even inflation expectations at distant horizons remained relatively stable, suggesting that central banks’ long-term credibility was intact, at least for the time being.
"But controlling inflation in the long term will require policy tightening. And with short-term inflation up, that means a quicker normalisation of policy
Since that date, the major central banks of the world have been struggling with lower than desired inflation and doing whatever they could to raise the rate of inflation. It would have been helpful to readers to point out that the BIS has been hugely wrong in its past warnings, so people in policy positions appear to have been right to ignore them. This is likely still the case.
The NYT finished a piece on the status of negotiations on Greece's debt with the comment:
"The bigger fear is that a Greek default could force the country eventually to be the first to leave the 19-nation euro currency union and threaten the regional integrity of the broader European Union."
It would have been helpful to tell readers who has these fears. After all, the current policies being imposed by the European Central Bank and the EU have cost the region millions of jobs and trillions of euros in lost output and threaten a whole generation's economic future. It is hard to see why anyone would fear the possibility that these policies may be reversed.
That's what readers are asking after seeing a NYT piece on reactions to the Supreme Court's ruling upholding the insurance subsidies in the Affordable Care Act (ACA). The piece gives comments from a number of people including John Kasich, the governor of Ohio and a likely candidate for the Republican presidential nomination.
"More typical was the response from Gov. John Kasich of Ohio, a likely Republican presidential candidate.
"'The law has driven up Ohio’s health insurance costs significantly,' he said, 'and I remain convinced that Congress should repeal it and replace it with something that actually reduces costs.'"
There has been a sharp slowdown in the rate of health care cost growth across the country. While this slowdown preceded the passage of the ACA, the law has likely been a factor contributing to the slower growth in costs. If Ohio is actually seeing rising insurance costs due to the ACA then it would be an outlier from the experience in the rest of the country.
If this is the case, it would be interesting to know the reason for the higher costs in Ohio. Alternatively, Kasich may just be saying this for political purposes.
James Stewart has a piece in the NYT telling readers that if Greece were to leave the euro it would face a disaster. The headline warns readers, "imagine Argentina, but much worse." The article includes several assertions that are misleading or false.
First, it is difficult to describe the default in Argentina as a disaster. The economy had been plummeting prior to the default, which occurred at the end of the year in 2001. The country's GDP had actually fallen more before the default than it did after the default. (This is not entirely clear on the graph, since the data is annual. At the point where the default took place in December of 2001, Argentina's GDP was already well below the year-round average.) While the economy did fall more sharply after the default, it soon rebounded and by the end of 2003 it had regained all the ground lost following the default.
Argentina's economy continued to grow rapidly for several more years, rising above pre-recession levels in 2004. Given the fuller picture, it is difficult to see the default as an especially disastrous event even if it did lead to several months of uncertainty for the people of Argentina. In this respect, it is worth noting that Paul Volcker is widely praised in policy circles for bringing down the inflation rate. To accomplish this goal he induced a recession that pushed the unemployment rate to almost 11 percent. So the idea that short-term pain might be a price worth paying for a longer term benefit is widely accepted in policy circles.
At one point the piece refers to the views of Yanis Varoufakis, Greece's finance minister, on the difficulties of leaving the euro. It relies on what it describes as a "recent blogpost." Actually the post is from 2012.
To support the argument that Greece has little prospect for increasing its exports it quotes Daniel Gros, director of the Center for European Policy Studies in Brussels, on the impact of devaluation on tourism:
“But they’ve already cut prices and tourism has gone up. But it hasn’t really helped because total revenue hasn’t gone up.”
Actually tourism revenue has risen. It rose by 8.0 percent from 2011 to 2013 (the most recent data available) measured in euros and by roughly 20 percent measured in dollars. In arguing that Greece can't increase revenue from fishing the piece tells readers:
"The European Union has strict quotas to prevent overfishing."
However the piece also tells readers that leaving the euro would cause Greece to be thrown out of the European Union. If that's true, the EU limits on fishing would be irrelevant.
The piece also make a big point of the fact that Greece does not at present have a currency other than the euro. There are plenty of countries, including many which are poorer than Greece, who have managed to switch over to a new currency in a relatively short period of time. While this process will never be painless, it must be compared to the pain associated with an indefinite period of unemployment in excess of 20.0 percent which is almost certainly the path associated with remaining in the euro on the Troika's terms.
In making comparisons between Greece and Argentina, it is also worth noting that almost all economists projected disaster at the time Argentina defaulted in 2001. Perhaps they have learned more about economics in the last 14 years, but this is not obviously true.
I should have also mentioned that the pre-default decline has been much sharper in Greece than in Argentina, over 25 percent in Greece, compared to less than 10.0 percent in Argentina. This should mean that Greece has much more room to bounce back if it regains control over its fiscal and monetary policy.
Okay, that may not have been the headline, but careful readers would see this is the case. The NYT ran a piece complaining that plans by the Greek government to raise business taxes, as opposed to further cuts to pensions and other spending, could hurt business.
The poster child for this argument is Thanos Tziritis, the owner of a family business that produces and exports a wide range of construction materials. The piece goes through the various complaints of Mr. Tziritis, at one point telling readers:
"Still, it took 20 months to get all the permissions and licenses to begin construction, as papers moved back and forth between Thessaloniki and Athens.
"One reason for the delay, Mr. Tziritis said he was told, was that one of the government employees examining the request was on maternity leave and no one else was authorized to look at that specific Isomat file. The project remained in limbo for more than six months until the civil servant returned to work."
Presumably one of the reasons that no one else could fill in for the government employee examining the construction request was that Greece was forced to cut back on the number of employees. It may well be the case that Greece regulations are excessive, but until they are reformed cutting back on the number of people involved in the review process is likely to slow investment and growth, as this article indicates.
The article bizarrely implies that Greece has been resistant to making budget cuts, complaining:
"The I.M.F., in particular, is upset that its demands for spending reductions have been ignored.
"'All expenditure measures have been replaced by taxes on capital and labor,' said a fund official who spoke on the condition of anonymity. 'This is very growth unfriendly.'"
In fact, total government spending has fallen by more than one-third since 2009, according to I.M.F. data.
It is also worth noting that, in violation on NYT policy, there is no reason given for why the fund official was granted anonymity.
The Washington Post ran a piece on Glenn Hubbard, the chief economic adviser to President George W. Bush and now an adviser to Jeb Bush, which ignored much of Mr. Hubbard's history. For example, it told readers:
"Hubbard believes that for too long, the United States has only experienced rapid growth in the midst of what he calls 'bubble economies,' which don't deliver broadly shared prosperity to workers. For example, he blames the Federal Reserve for stoking a bubble in the mid-2000s by keeping interest rates too low for too long."
While the piece notes that Hubbard had been an adviser to Bush during part of this period, it neglects to tell readers that he never said anything about the housing bubble. In other words, Hubbard's analysis is 100 percent hindsight, he completely missed the $8 trillion housing bubble, the collapse of which has devastated the economy.
He is also mistaken in claiming that bubbles cannot lead to "broadly shared prosperity to workers." During the 1990s stock bubble, the unemployment rate eventually fell as low as 4.0 percent. During these years workers at the middle and bottom of the wage distribution saw healthy wage gains. The problem is that this growth could not be enduring, since it was based on a bubble.
It also would have been useful to remind readers that Hubbard had done excellent research indicating the Bush tax cuts would not be likely to have the promised effect of increasing investment. Hubbard's research showed that investment is very unresponsive to reductions in the interest rate. The stated goal of tax cuts directed at high income households was to give them more incentive to save and thereby lower interest rates. If investment is unresponsive to a reduction in interest rates, then this is unlikely to be an effective route to boosting investment and growth.
My colleague, Nicholas Buffie, calls my attention to a paper that Professor Hubbard co-authored for Goldman Sach's Global Markets Institute in 2004, near the peak of the bubble. The executive summary of the paper told readers:
“The ascendancy of the US capital markets — including increasing depth of US stock, bond, and derivative markets — has improved the allocation of capital and of risk throughout the US economy. Evidence includes the higher returns on capital in the US compared to elsewhere; the persistent, large inflows of capital to the US from abroad; the enhanced stability of the US banking system; and the ability of new companies to raise funds. The same conclusions apply to the United Kingdom, where the capital markets are also well-developed.” [emphasis added]
“The development of the capital markets has also facilitated a revolution in housing finance. As a result, the proportion of households in the US that own their homes has risen substantially over the past decade.”
“The capital markets have also acted to reduce the volatility of the economy. Recessions are less frequent and milder when they occur. As a result, upward spikes in the unemployment rate have occurred less frequently and have become less severe.”